Organic sector is proving resilient

2008 was a year of changes in the organic dairy sector, illustrated by flows of organic milk into and out of the UK. At the start of 2008 organic milk was being imported to plug an undersupply in the UK and at the end of the year this situation was reversed to take advantage of favourable exchange rate and a shortage of supply in mainland Europe.

Although much has been written about the demise of the wider organic market as a result of the economic downturn, the organic dairy sector has fared better than most. Liquid milk sales in major retailers have held up fairly well with sales volumes only down 0.3% in 2008 against 2007.

The reason for the resilience of organic dairy in difficult trading circumstances can be attributed to the clearly communicated benefits of organic milk, as well as the low price premium over conventional which can be as little as 15%.

Despite an underlying growth in organic cheese sales, cheesemakers have cut back production after a period of over expansion, which ran ahead of the increases in sales. This has had an impact particularly on the utilisation of spring milk which was previously destined for the cheese market. In addition to a reduced demand for milk for cheese, returns from the limited organic powder market have followed prices in the non-organic sector downwards.

The arrival of more than 100m litres of organic milk from new converters, who started conversion in 2006 and 2007, has also had to be absorbed by the market. It’s never going to be easy to match increases in supply with growth in demand, given the conversion period of at least two years.

These issues have resulted in prices to organic producers being reduced by up to 4p.litre over the past six months and when coupled with consistently high feed costs, margins have reduced significantly. This has forced many organic dairy producers to consider their options.

Recently some organic dairy producers that have been delaying retirement are now deciding to sell up. Other producers conclude that in absence of a significant increase in their revenue or reduction in feed costs, their system is not well suited to organic, and will revert permanently to non-organic milk supply. There may also be some producers, who are not able to find an organic market for their milk and will also be forced to change to non-organic supply.

The situation is finely balanced and the size of the industry is such that the decision of a few large producers to cease organic milk supply, could quickly change the balance. We could therefore see growth in sales restricted by supply in the near future. If the market works effectively, the rebalancing of the supply and demand should lead to an improvement in farmgate returns which will eventually deliver the new entrants required if the market is to continue to grow.

The next year will be challenging for organic dairy producers, but the current resilience of liquid milk demand combined with organic’s small 3% share of the dairy market, should provide a positive outlook for committed producers. It is too early to be influencing those choosing to leave the industry or contemplating conversion, but it may not be too long before we need to be more active in this area.